The U.S. dollar retreated broadly on Thursday after investor optimism, sparked by signs of easing tensions in the U.S.-China trade war, quickly dissipated. The retreat followed a brief rally on Wednesday, when U.S. President Donald Trump eased concerns about Federal Reserve Chair Jerome Powell’s position and appeared to soften his stance on trade with China.
Optimism Fades as Trade Negotiations Stall
On Wednesday, the dollar and other U.S. assets rallied as Trump backed down from his earlier threats to fire Powell, and Treasury Secretary Scott Bessent remarked that the ongoing de facto U.S.-China trade embargo was unsustainable. However, by Thursday, optimism faded as China denied that any meaningful trade negotiations had taken place and insisted that the U.S. must lift its unilateral tariffs if a resolution was to be reached.
Mixed Signals on Trade Talks
Despite these developments, President Trump maintained on Thursday that talks with China were ongoing. He told reporters, “They had a meeting this morning,” without providing further details. However, market observers pointed out that the divide between the U.S. and China on trade terms remained substantial.
“It seems like there’s a gulf as wide as the Pacific Ocean between how the U.S. and China are viewing trade,” said Matt Weller, head of market research at StoneX. “And as long as that gulf remains, the rallies in the dollar might be short-lived.”
Impact of Tariffs on the Dollar
On Thursday, the yen led the currency market rally, with the dollar down 0.54% at 142.700 yen, although still above the 140-mark breached the previous week. The dollar has been the hardest-hit currency due to Trump’s on-again, off-again tariffs, falling 4.8% in April alone, marking its biggest monthly drop since November 2022.
Investor Sentiment and the Dollar’s Struggles
Investor sentiment was further shaken after Trump’s verbal attacks on Powell, who has been reluctant to cut interest rates until economic data warrants it. The resulting pullback from the dollar has led it to its worst start to the year against a basket of currencies since the 1970s, according to LSEG data.
“There were hopes of a thaw in the U.S.-driven trade dispute with absolutely everyone,” said Trade Nation strategist David Morrison. “But it turns out it takes two to tango, and for now, the Chinese leadership has decided to let the Trump administration stew in its own mess.”
Safe-Haven Currencies Shine
The Swiss franc, benefiting from heavy safe-haven flows, strengthened against the dollar, which dropped 0.33% to 0.82795 francs. Meanwhile, the British pound gained 0.55% to $1.3325, buoyed by comments from UK Finance Minister Rachel Reeves, who expressed confidence that Britain could reach a trade deal with the United States.
Outlook
With continued uncertainty surrounding the U.S.-China trade relationship, the dollar’s future remains unclear. As market participants wait for clearer signals on tariff negotiations, the dollar’s performance will likely continue to be influenced by trade developments and broader economic policy decisions.
